When I last examined Petrofac (LSE: PFC), I finished by saying “I’ll keep watching, especially the court sentencing thing. If that doesn’t go too badly, I might put Petrofac on my list.” At the time, the Petrofac share price had just jumped 50% in two days.
Since then, the Serious Fraud Office (SFO) case concluded better than I expected, and Petrofac shares climbed higher on the news. But I might not have missed my chance, with the stock crashing 15% by early afternoon Tuesday. So what’s happened?
Firstly, Petrofac shareholders have had a very volatile year. At the time of writing, the shares are up 11% over the past 12 months. But during that year, they’ve swung between a low of 30% below the current price, and 50% higher. And up and down a few more times in between.
Petrofac share price moves
The latest moves come as a result of two things. The oil and gas services firm released first-half results, and followed that with details of a new equity issue.
Via a combination of placings and an open offer, Petrofac proposes to issue new shares to raise gross proceeds of approximately $275m (£200m). The new shares will be priced at 115p apiece, for a discount of 27.2% on the closing price on 25 October. That’s a chunky discount, and I’m not at all surprised to see the Petrofac share price fall as a result. As I write, Petrofac shares stand at 134p. So the new issue is at a discount of just 14% on that price.
I do think the company has timed and priced this pretty well, from the perspective of raising as much cash for as little equity as possible. Had it tried it while the SFO’s bribery case was pending, the uncertainty would surely have dissuaded many. And the Petrofac share price was a fair bit lower then too.
Using the cash
What is the cash for? Some of it will be used to pay the $106m (£77m) penalty arising from the SFO case. And some of it will be used to pay down debt, as part of the company’s refinancing plans.
Turning to H1 results, Petrofac recorded a reported net loss of $86m, which it said largely reflected the court penalty. At 30 June, the balance sheet showed net debt of $188m (but with liquidity put at $1bn). The firm’s focus for the future, coming out of a tough period, is on “refinancing to create a long term, sustainable capital structure.” That includes the new equity issue, $550m in new debt facilities, and a $180m revolving credit facility.
Future risk
The oil and gas industry is strengthening after the Covid crash, and that’s good for services businesses. But Petrofac is still open to future shocks should we see a fall in demand and a fresh oil price crunch. Chinese economic growth is slowing sharply, and I wonder if that might spread.
Then there’s the task of winning back confidence, after being dragged through the courts and penalised for bribery. So yes, there are risks to the Petrofac share price.
But to follow up on my closing note from last time — the court sentencing thing didn’t go too badly, and I have put Petrofac on my potential buy list.